Taxing the value of employer paid health insurance, how will workers react?

4 Oct
Paul Ryan (politician)

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It is virtually inevitable that at some point at least a portion, if not all, of the employer paid health insurance is going to become taxable income to workers.  The quest for additional revenue is simply too great for this source to be ignored for much longer as the revenue loss to the federal government is massive on this benefit.  In addition, with the words “fair share” being thrown about it is hard to argue that all Americans should not be treated the same when it comes to taxing health benefits.  In other words, if you receive health insurance from your employer, why should you have a better tax break than someone who pays for insurance on his own?   There is precedent for taxing at least a portion of this benefits.  For many years employer-provided life insurance has been taxed under Section 79 of the IRC for the value of the insurance exceeding $50,000. 

On the other hand, while Congress is worried about the revenue loss from this tax-free benefit (income), under Section 125 of the Internal Revenue Code, an employee can pay his or her share of the premium (generally 25% or more of the total cost) on a pre-tax benefit.  It would seem more logical to first eliminate this pre-tax premium benefit rather than to begin with taxing the employer contribution.  Holy cow, I used “logical” and Congress in the same paragraph.

As if the revenue issue were not enough, you have  politicians demonstrating their lack of knowledge about this entire issue. In a speech at Stanford University Rep Paul Ryan said the government should replace the income tax exclusion for people who get employer-sponsored health care and replace it with a refundable tax credit that they could use to purchase coverage on their own. Some 170 million Americans are now covered through the workplace. According to Ryan it would give consumers the needed incentive to demand better value out of their health care.

“Giving patients and consumers control over health care resources would make all Americans less dependent on big business and big government for our health security; give us more control over the care we get; and force health care providers to compete for our business,” Ryan said.

I admire Mr. Ryan for his budgetary skills and innovative thinking, but on this issue he sadly demonstrates his lack of understanding about health benefits and the inherent value added by employer based coverage especially for the 70 million Americans enrolled in employer self-funded plans.  I will talk more about this issue in another post, but dismantling the employer based system and turning Americans lose to fend for themselves is just plain dumb.


Public Reaction to Changing the Tax Treatment of
Employment-Based Health Benefits

WASHINGTON—The recent deal in Washington to raise the debt ceiling and reduce the deficit did not include any changes to the preferential tax treatment of employment-based health benefits, but it does open the door to further cuts. 

Capping and eliminating the preferential tax treatment of employment-based health benefits as it applies to workers has been proposed in the past and was recently proposed by President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform and The Heritage Foundation. The tax preference associated with employment-based health coverage is the largest tax expenditure in the U.S. budget, accounting for $1.1 trillion in foregone tax revenue during 2012–2016. Changing the tax preference may therefore be one option that the super-committee considers.

According to the 2011 Health Confidence Survey, recently released by the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, if the tax law was changed such that the value of employment-based health coverage was taxed, some individuals would change how they get covered while others would drop coverage: 

  • 29 percent would continue their current coverage.
  • 33 percent would switch to less costly employment-based plan.
  • 26 percent would shop for insurance directly from an insurer.
  • 8 percent would drop health insurance altogether


The 2011 HCS is the 14th annual wave of this survey to assess the American public’s attitudes regarding the U.S. health care system. It was conducted by the nonpartisan Employee BenefitResearch Institute (EBRI) and Mathew Greenwald & Associates, Inc., a Washington, D.C.-based market research firm. The full report is published in the September EBRI Notes, online at

2 Responses to “Taxing the value of employer paid health insurance, how will workers react?”

  1. HDHP Expert October 6, 2011 at 6:24 AM #

    The fact that it is in inevitable that employer-paid benefits will become taxable to the employee is another example of it being time to disassociate employers from medical insurance. Gone are the days of individuals working for companies for their entire careers, and gone are the days where employers feel responsible for taking care of their employees health because they are most likely to get injured/sick due to occupational hazards.

    When employer-sponsored health insurance became the norm, life expediencies were far shorter, premiums were far smaller and brand name drugs did not exist to the level they do today.



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